To some, one credit card is as good as another. But American Express (NYSE:AXP) and MasterCard (NYSE:MA) have fought hard to gain a competitive edge in the industry. MasterCard has followed the pathway of international expansion as it tries to make its payment network as large as possible, while American Express instead seeks to keep an upper-class reputation while also taking on the added risks and rewards of retaining credit exposure to its cardholders, to whom it issues cards directly. By comparing American Express and MasterCard on a number of key metrics, investors can decide which of these stocks makes more sense for them.
Valuation and stock performance
American Express and MasterCard have both done quite well over the past year. American Express has a slight edge with a 32% gain since June 2016, but MasterCard is only a bit behind its industry rival with a 29% rise.
American Express, however, has a much more attractive valuation in terms of its recent earnings. When you look at what the companies have brought in over the past 12 months, AmEx trades at a trailing earnings multiple of less than 15. That compares to more than 32 times trailing earnings for MasterCard, whose growth has led investors to give it a higher valuation.
The same trend shows up when you incorporate future earnings expectations into the picture. MasterCard's forward earnings multiple drops to below 25, but AmEx trades at just 13 times forward earnings. That makes American Express more of a bargain from a valuation perspective.
Dividends haven't been a huge priority for companies in the card and electronic payments industry, but American Express takes a clear lead in terms of dividend yield. AmEx boasts a current yield of 1.6%, which is more than double the 0.7% that MasterCard currently pays.
That said, both companies have done a good job of keeping their dividend payouts moving higher. American Express has raised its dividend every year since 2012, with increases typically amounting to between 10% and 15%. MasterCard's increases have been even sharper, with boosts of 83%, 45%, 19%, and 16% in the past four years. Even so, both AmEx and MasterCard have very low payout ratios compared to their earnings, showing that they have plenty of capacity to grow dividends more quickly if they choose.
One thing to keep in mind is that American Express and MasterCard also use share repurchase arrangements to return capital to shareholders. Some see that as a more favorable method than dividends. With both companies having a commitment to buybacks, when you consider their respective efforts solely from a dividend perspective, American Express takes the day.
Growth prospects and risks
American Express and MasterCard have seen different challenges affect their respective businesses. American Express has had to go all out to restore growth after losing its co-branded card partnership with Costco Wholesale (NASDAQ:COST), but early results have been somewhat encouraging. Total loans outstanding were up at a double-digit percentage clip in its most recent quarter, and American Express also saw rises in customer spending when you adjust for the one-time impact from the major partnership loss. AmEx has had to boost the level of rewards it pays its cardholders to stay with it, but efforts to boost marketing spending have had a beneficial impact. Changing conditions in the interest rate environment could put some pressure on borrowers, but overall, American Express has some growth opportunities on which it can seek to capitalize.
Meanwhile, MasterCard is also looking for ways to bolster its business in a competitive environment. In its most recent quarter, the card giant saw sales climb 12%, and net income rose at nearly the same pace as MasterCard took advantage of strengthening in the U.S. and global economies. Key acquisitions have given MasterCard more potential to participate in the payment-processing sector, and with mobile payments becoming increasingly important, the card company isn't simply focusing on its core business. CEO Ajay Banga has said that he believes that areas like strengthening card-security measures and putting money into following data analytics could help pay dividends in the long run.
When you consider all these factors, American Express has an edge over MasterCard, despite having faced more growth challenges lately than Mastercard has. American Express' better dividend and more attractive valuation give it more room to run higher, as well as serve as a margin of safety against further risk.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale and Mastercard. The Motley Fool recommends American Express. The Motley Fool has a disclosure policy.